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Saturday, July 15, 2017

Brian Gaynor: Red tape tying business in knots

The massive increase in rules, regulations and compliance is one of the major issues facing New Zealand businesses. This regulatory imposition is accelerating, even though we have a right of centre, supposedly business-friendly Government.

Board and management meetings are now clogged with compliance issues and attendees often have little time to discuss long term strategic plans.

This is a major concern because directors meetings should be primarily focused on long term strategy, rather than day-to-day compliance matters.

The Health and Safety at Work Act 2015 is a good example of this. Under the act, a director can be personally liable for health and safety issues, with a maximum prison term of 5 years and/or a fine of up to $600,000. The day-to-day requirements of this legislation can take up considerable meeting time because directors have to pay fines out of their own pockets: they are not allowed to take advantage of the company’s insurance policies.

Health and safety is important, but with the service sector representing approximately two-thirds of the country’s economy activity, it is less important than it was when manufacturing and other blue collar industries played a more important role.

Directors and management are spending a large amount of time – even for a small service business with two or three office staff – on a wide range of compliance issues when common sense should prevail. These compliance issues can be a huge financial burden for start-up businesses.

Sir Robert Jones, arguably one of New Zealand’s most successful businessmen over the past 50 years, places a huge emphasis on long term thinking. He repeatedly argues that reading books and having time to contemplate the future are two of the most important criteria for business success. This is sound advice, but directors and senior executives have little time to read books if they are swamped by compliance issues.

Jones is totally opposed to bureaucratic rules, as reflected in his battles with the old Securities Commission and with Air New Zealand.

In 1993 the Securities Commission took Jones to court under the Securities Amendment Act 1988 for not disclosing his sale of shares in NZX-listed Robt. Jones Investments (RJI).

Jones argued that his employees, rather than him, should be primarily responsible for understanding and implementing the requirements of the 1988 act.

Justice McGechan essentially agreed and decided that he had no reason to believe that Jones was aware of the disclosure requirements of the 1988 act. Although the learned judge concluded that the defendant did not deliberately attempt to conceal his share sale, he determined that he should have known the rules.

Jones was ordered to pay costs of $250,000 and forfeit 6 million RJI shares, which were worth only 8c each at the time. This compared with a range of penalties sought by the commission, including the forfeiture of all of 40 million RJI shares held by Jones at the time of the trial.

Two years ago, the media reported that Jones was escorted off an Air New Zealand flight for refusing to remove his headphones during the pre-flight safety instructions.

Shortly afterwards, Jones’ holding company purchased a private jet, but the rest of us don’t have that option to avoid airline safety requirements.

He wrote in his media column that he could now avoid “the incessant and unnecessary hostess babble over the intercom, the utterly childish and pointless screeching safety video, the absurd seat-by-seat check that we’re an inch or two upright at exactly 20 minutes before landing”.

We all understand the need for airport and airline security rules and regulations, but they have become incredibly inconsistent around the world and a number of the safety procedures are difficult to rationalise. In addition, airports and airlines usually don’t have signs that clearly outline their safety screening procedures.

Herein rests one of the problems: we swing dramatically from too little to too much regulation, based on one or two high-profile incidents. Rules-addicted ministers and officials introduce a raft of rules and regulations with limited explanation, no obvious cost/benefit analysis and little concern for the costs they impose on businesses.

Directors and management are being challenged by the huge increase in compliance requirements and regulation in the workplace, when it is important that boards put aside quality time to think about the future.

One of the best individuals to challenge our thinking is Thomas Friedman, the New York Times columnist who has been awarded the Pulitzer Prize three times. Friedman was one of the major attractions at the recent Auckland Writers Festival, where he spoke about his latest bestseller, Thank You for Being Late: An Optimist’s Guide to Thriving in the Age of Accelerations.

His previous books include the bestsellers The Lexus and the Olive Tree and The World is Flat.

Friedman’s latest title is based on the premise that his perpetually busy schedule allows him limited time to contemplate the future. As a consequence, he is grateful when his coffee appointments turn up late, as it gives him time to think about big picture trends.

Some of the main themes of Friedman’s latest book are:

We are in an “age of acceleration” that is transforming nearly every aspect of modern life. This is having a massive impact on the availability of information and on ideas, innovation, the climate and most business sectors.

He writes about the massive disruption occurring in most industries and the increasing influence of Google, Facebook, Twitter, the iPhone and other technology. He marvels that Uber has become the world’s largest taxi company without owning a taxi and Airbnb the largest hotel operator without owning a hotel.

This radical, rapid technology shift is making many people feel dislocated and left behind. The book was published just before the US presidential election, but it helps explain why Donald Trump attracted large support in smokestack states.

Friedman, who comes from the dairy state of Minnesota, has interesting observations on farming. He believes that farmers trudging through the pre-dawn mud to milk cows will become a thing of the past as computers will increasingly monitor and control udders, supply chains and milk flows. He writes: “in the future a successful cow milker may need to be an astute data reader and analyst”.

Friedman is an optimist, even though he believes the rate of change is greater than it has ever been, and many people are feeling left behind as they have either lost their job or are concerned that they will be replaced by robots.

He wraps up his thesis with the following paragraph: “But it is impossible for me to believe that with so many people now empowered to invest, compete, create, and collaborate, with so many more cheap and powerful tools enabling us to optimise social and commercial and government interactions, that we won’t develop the capability to solve the big social and health problems in the world and that, in the process, we won’t find ways for humans to become even more resilient, productive, and prosperous as they are reinforced by intelligent machines”.

As Friedman is an optimist, he would argue that New Zealand directors and managers will eventually come to terms with the huge increase in regulations and compliance.

However, he makes the point that change is accelerating because it is globally based, rather than US-centric, and these global trends are already impacting on most New Zealand businesses.

In light of this, it is vitally important that boards and senior management put aside plenty of time to focus on the major long-term trends while still coming to terms with the massive growth in compliance requirements.

Brian Gaynor
is an investment analyst and the Executive Director of Milford Asset
Management.

4 comments:

Peter
said...

Red tape is stiffling the country. Small business are swamped with regulations. Businesses decide to close shop (or move overseas) rather than contend with bureauracy. A snippet on the television news about the MPI requiring eelers to have televison surveillance and other equipment on their boats. Great idea; but no one thinks of who will sit and watch the footage. For a large building a surveillance system works. For a small business it is an absolute waste of time.

But look on the bright side. All this exceedingly complex occupational safety and health stuff has spawned a new species of flea.It is called the OSH industry consultants. The costs they put on my 200 member sporting club are awful. The Fleas' reports become required reading for insomniacs, for they will put anybody to sleep. Their Doomsday predictions would make any Green Party activist writhe in orgasmic delight.

The problem s not confined to the boardroom. I repeatedly meet older tradesmen who operated small business. But safety rules and risks are so bewildering , cumbersome to manage, and legal advice so expensive, and the risk of liability so daunting, that they prematurely abandon the business. Yet small business was reckoned as major source of employment, especially of new employment. Now only large companies can handle the situation; these soon become monopolies, then overseas owned. Employee conditions are screwed down, older workers laid off, immigrants favoured, and profits sent offshore. In several ways, the public pays many times over for any reduction in ACC spending.Often for those laid off, the only hope of a secure job is as a safety official. Hence the relentless pressure to expand that make-work industry.

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